As readers of these pages may recall, Houston-based Rosetta (ticker: ROSE) is a smallish oil-and-gas outfit run by a team of seasoned execs who left top jobs at industry giants like ConocoPhillips to strike out on their own. What they were eager to build, as Barron's explained in a thumbs-up story ("Resourceful Rosetta," June 14, 2010), was a company that could exploit unconventional energy sources like shale. At the time, the stock was 25. It got as high as 51 earlier this month and closed Friday at 42.98.

The Eagle Ford, a shale play in southern Texas, could add 50% to Rosetta's cash flow per share in 2012.
Roger Milley/Getty Images

The juice for the strong performance has been Rosetta's remarkable transformation from a run-of-the-oil-patch producer into a potential powerhouse, thanks to the speed and efficiency with which it is moving to exploit its vast acreage in two of the country's most promising shale plays. One is the Southern Alberta Basin in northern Montana, conceivably the next big thing if it proves an extension of the enormously productive Williston Basin to the east. Rosetta holds 300,000 acres.

An even more important catalyst has been the astonishing pace of development in the Eagle Ford in South Texas. From virtually nothing a year ago, output last quarter spurted to 89 million cubic feet equivalent a day, almost 60% of total production. Even after divestitures, year-end output should jump to 185-195 MMcfe/d—with the Eagle Ford chipping in a whopping 80% of that.

Production from these wells has put them on a pace to outstrip early estimates of what they will yield over their lifetimes, a benchmark already ratcheted up from four billion cubic feet equivalent to 7.2 Bcfe. Output is low-cost and liquids-rich, so margins are expanding apace. And it's just the beginning: Rosetta has drilled only 7% of its prospects in a field that accounts for less than half of its 65,000-acre Eagle Ford stake. Moreover, while current wells recover a mere 14% of the hydrocarbons in the ground, Rosetta believes that it eventually might recover as much as 25% by drilling more wells closer together.

Fueled by the Eagle Ford, earnings are expected to hit $1.80 a share this year and $3.30 next, while cash flow is pegged at just under $6 a share this year and close to $9 in 2012.

Meanwhile, in the Alberta Basin, Rosetta has drilled 11 vertical test wells spread across its vast acreage. John Clayton, its vice president of asset development, says that the company has found "large accumulations of oil in every well." Significantly, Rosetta has shelved the idea of a partner, choosing instead to drill three horizontal wells on its own dime, says CEO Randy Limbacher, because "we like what we see so much."

Rosetta's stock is going for about seven times this year's estimated cash flow and under five times 2012's. It sells well below a net asset value of $60 to $65, which by no means fully reflects the terrific potential of the Alberta Basin. Should that play pan out, the stock could double.

-- Rhonda Brammer

We Goofed: BlackBerry Maker Is a Goner

Research In Motion,
maker of the BlackBerry smartphones, has easily been Barron's worst pick of the year. After the company lowered its profit guidance last week, the shares are down 48% since our bullish story of two months ago ("The BlackBerry Strikes Back," April 18).

We woefully underestimated the difficulty the company (ticker: RIMM) would have in meeting its white-hot competition. It has repeatedly postponed new products, just as
Apple
(AAPL) readies the next iPhone and
Google's
(GOOG) Android operating system spawns a whole new class of rivals.

RIM is in dire need of better models. It reported last week that quarterly sales of its smartphones were down for the first time since 2005. Worse, it lowered its forecast of 2012 earnings to $5.25 to $6.00 a share from $7.50, the second such cut in seven weeks.

Our biggest mistake was to put too much faith in RIM's co-CEOs, Mike Lazaridis and Jim Balsillie, whom we'd long admired. They've not only disappointed us; they've done worse than some bears expected. The best hope now is a takeover, but there's no suitor in sight. Cheap as the stock has become, the only choice is to sell.

-- Jay Palmer

VF and Timberland: A Beautiful Fit

Pairing Wrangler jeans with Timberland boots makes a cool fashion statement. The combination of Wrangler maker
VF
and Timberland, known for its iconic yellow work boots, also fits, strategically and financially.

VF (ticker: VFC) agreed last week to pay more than $2 billion for
Timberland
(TBL) in a deal that had Wall Street applauding. VF stock opened Tuesday around 103, more than 10 points above its Monday close, and finished the full week at 102.80. The shares could rally to 120 or more in the next 18 months, assuming the deal adds to earnings, as VF expects.

The Timberland deal is a step in the right direction for VF.

Typically, the buyer's shares fall when a deal is announced. But Timberland's attractions are far from typical. Once in the VF fold, it will boost VF's outdoor business, expand its presence overseas, and add 25 cents a share to earnings this year and perhaps 75 cents the following year, according to VF management. The company is paying a 43% premium to Timberland's closing price the last trading day before the deal was announced.

VF's ability to expand its portfolio of brands, which include North Face and Vans, was one reason Barron's plucked the stock from the discount rack last summer, when it traded at 72 ("A Closetful of Opportunity," July 19, 2010). VF has hit our 100 price target, but still sells for a relatively inexpensive 14 times analysts' estimated earnings of $7.38 a share for this year. "It is the kind of stock you want to own in this environment," says Sterne Agee analyst Kenneth Stumphauzer. "It is solid, safe and defensible."

Stumphauzer has a 118 price target on VF, and a Neutral rating, due, in part, to his concerns about higher input costs. VF stock slid in April, amid worries about higher cotton prices, even though the company beat analysts' first-quarter views. With the Timberland deal, though, it is well positioned to sidestep this near-term volatility and get a major leg up on the competition.

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